An insurance policy is a type of contract between an insurance company and an insured party to cover an asset. In the event of damage to or loss of the asset, the insurance company is obligated to cover the insured party when a claim is made on the asset. In exchange for insurance coverage, the insured party pays the insurance company an insurance premium. In the context of vehicle insurance, insurance premiums are typically calculated based on industry standard factors, such as vehicle type, driver history, and location of vehicle. In the context of life insurance, premiums are calculated based on the insured's age, lifestyle, occupation, and other factors affecting longevity.
Insurance premiums are generally set for broad statistical classes of people. In addition, insurance premiums are generally fixed for the length of a policy, from six months up to a year, or more, in some cases. The combination of these elements may result in premiums that do not match the risk, resulting in lost profits for an insurance company or overpayment by an insured party.